What is the overall rate of return to investors

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Reference no: EM13885229

A warrant is a long-term option from a company that gives the holder the right to buy a stated number of shares of the firm’s stock at a specified price for a specified length of time. Generally, warrants are distributed with debt, and they are used to induce investors to buy long-term debt that carries a lower coupon rate than would otherwise be required. The exercise of warrants brings in additional funds to the firm.

A corporation decides to issue 10-year bonds to fund a necessary expansion. If they were straight bonds, they would carry an 9% annual coupon. However, the bonds with warrants can be sold with a 7% coupon. Thus, investors would be paying $800 in return for the 7% coupon, 10-year bond and 23 warrants.

Suppose that the warrants expire in 5 years, and the exercise price on the warrants is $11. (Remember that each bond includes 23 warrants.) The firm’s current stock price is $9.50, but the price is expected to grow by 16% per year.

Assuming that the warrants will not be exercised prior to expiration, what is the overall rate of return to investors? Round your answer to two decimal places.

Reference no: EM13885229

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